Germany lays foundations for revival in construction
The Continental European construction sector rose 34% in 2006 driven by positive organic growth. Despite the hindrance of high energy costs, companies generally had good pricing power and were able to pass these costs on to customers, allowing them to outperform.
Demand for cement for example was high in the fourth quarter due to favourable weather conditions and the turnaround in economic fortunes at a macro level also boosted a number of construction companies in Europe.
This included several German firms that were moderately profitable in 2006 for the first time in a decade. There has been a revival in demand for German construction companies with beneficiaries including HeidelbergCement.
Other cement stocks did well following corporate restructuring. Lafarge shares were up 47% in 2006 because of a change in management and internal restructuring, while Eiffage rose 58% because of takeover rumours.
Another good performer has been Ireland’s CRH, which has a high exposure to the US. Despite the downturn in residential housing, non-residential construction in the US has been very strong, according to Steven Maxwell, investment director at Scottish Widows Investment Partnership.
CRH’s main US interests are in non-residential property and it only derives 10% of its profits from US housing construction.
"We have exposure to construction companies including CRH, Lafarge, HeidelbergCement and the Scandinavian firm Veidekke, and we are very happy to continue with these," says Maxwell.
Rob Burnett, investment director and head of European equities on the sector at Neptune, is not so optimistic.
He says: "Broadly speaking, GDP growth is going to slow in 2007, which will be a bit of a headwind for the industry as a whole.
"However, investors can still do well from this sector as long as they get their country-specific exposure right. Spanish construction does not look so good but most of Europe is ticking over."
The sector typically trades in line with GDP because it is a key driver of basic economic growth, so a forecast of lower GDP would indicate construction stocks underperform.
Burnett does not hold a high number of construction stocks and describes the portfolio’s exposure to the sector as neutral.
Maxwell also points out that European construction companies with US exposure will be affected if the dollar weakens, because it would dent their earnings from that country. Construction companies will also suffer if there is a rise in inflation leading to a great increase in short-term interest rates.
However, Burnett adds: "In 2007 there will be some corporate restructuring like in 2006 where value can be realised, though it is annoying that there are not more German pure construction stocks."
German construction companies were forced to diversify during the downturn of the last decade because they were faring so badly.
Published under Cement News
